How Do I Become a Contractor?

This is a question we often get asked as we are specialist freelancer accountants and look after the accounting and taxation affairs of many freelancer and contractors.

First thing is find out whether there is any demand for your services? Do you work in an office where they use other freelancers or contractors? Maybe chat with them to see how they find the market. Register with a recruitment agency who specializes in the area of work you do, who covers the geographical area s that you will be prepared to work in, and also ask them about the state of the market, then wait for the offers to arrive.

One you have tested the market, perhaps have an offer of work, then it is time to consider how you should set yourself up from a tax and accounting perspective.

Most freelancers and contractors would use a limited company as some companies will not allow you to contract as anything else or use an umbrella company.

Umbrella companies can be useful if the contract is inside of IR35 or is a short term contract, they tend to be very practical vehicles for getting contractors, contracting quickly, the downside is they are not particularly tax efficient especially if you are outside of IR35.

The option most freelancers or contractors take is form their own limited company and use that vehicle for their contracting. A company can be formed relatively quickly but will need its own business bank account and the appropriate registrations with HMRC for corporation tax, payroll and VAT, so if you are wanting to use a limited company for your contracting then it is better for you to start this process three to four weeks before you need the company so that it is ready for you to use with all the necessary registrations completed. You may also need your contract and working practices reviewed for IR35 purposes, which is something which as accredited professional contractor group accountants we have received additional training in, as well as being Certified Chartered Accountants.

If you are thinking about contracting talk to us as we will be able to advise you on the most appropriate vehicle to undertake your contracting and set it up correctly, so you can make your contracting more enjoyable and financially rewarding.

The first time somebody becomes a contractor there are ample opportunities for them to make mistakes. We have come across many types of freelancers and contractors over the years and perhaps the ones most likely to make these types of mistakes are the ones who know ‘everything about nothing‘. You will probably know the type, don’t let that be you.

Starting work without a contract

Starting work without having a contract in place or getting the contract reviewed for IR35. Your client will often have a pressing need for your services and getting you through the door will be the main priority. A contract is necessary as it defines each party’s responsibility and the scope of the work, so any disputes can be easily resolved. Also it is a vital indicator of whether you are inside or outside of IR35 and ultimately what tax you pay.

Treating the company’s money like your own

New contractors often make the mistake of not making this mental separation, that the company’s money is not their own money. This can lead to problems such as VAT and corporation tax money being spent. Just because there is a positive bank balance it does not mean the company is solvent.

Misunderstanding expenses

Expenses are an allowable deduction for corporation tax and you can only claim for expenses that are wholly and exclusively incurred for the purpose of your trade. If I had a pound for everyone who has attempted to put a business suit through their business and claimed they only wore a suit for business purposes I would be a rich man. Listen to your accountant and do not abuse expenses as HMRC will pickup on any expenses incorrectly claimed and fines and penalties will accrue.

Using tax avoidance schemes

Beware of any scheme which promotes take home rates of 85-90%, we have never come across one which we think will not come back and bite you, and we have seen a few people who have used them and have had years of trouble and stress from HMRC, if it is too good to be true then it probably is.

Making hay whilst the sun shines

We often get contractors who have worked solidly for five or six years, and then through change of circumstance, such as change of location, look for an accountant nearer to where they are now located and talk to us.

We find these contractors will have been so busy they haven’t taken the time out to chat through their business with their accountants, and obvious tax savings have been missed and are now lost. Savings which are lost can run into the tens of thousands of pounds.

An hour chatting to your accountant per year, may be your most lucrative hour of the year.

Taking pub advice

Always use a qualified accountant or tax advisor, and be wary of any advice given to you by a colleague, friend or online forum. Yes use them to guide your questions but don’t take as fact what is said as it is likely to land you in trouble with HMRC.

to be continued…………..

Freelancer Accounting helps many contractors who are new to freelancing and contracting, in London, Canary Wharf, Reading, Richmond and Guildford so we know how daunting it is to most people, especially if you have worked as an employee under PAYE, and had everything taken care of for you.

Don’t worry

You needn’t be out of your comfort zone, as it may be new to you, but we are old hands at contracting, and are accredited by the PCG as well as being regulated by the ACCA and partnered with many leading contractor suppliers such as Cater Allen, Caunce OHara and Contractor Financials.

What are your options?

We can talk you through what are your options. Whether an umbrella company or a limited company would be best.

If required we can form your limited company for you and register it with HMRC for corporation tax, Payroll and VAT. We can assist you in obtaining a business bank account.

And also advise you on specialist areas of taxation such as the settlement legislation and IR35.

Face to Face meetings

We talk you through what business expenses can be claimed against tax, and the responsibilities that working through a limited company entails.

We also have an online portal, which has lots of useful information to help you along your contracting career, which all clients have acess to, as well as our online accounting software that is available to you 24/7 and telephone support during office hours.

Why not give us a call, or take advantage of a free initial consultation?

Is there a glimmer of hope on the horizon for freelancers and contractors?

The economy is in a difficult place, post credit crunch, with growth stagnant and trouble brewing in the Eurozone. It is easy to become negative about the whole situation, but for those of us old enough, or for students of the dismal science, of which I am both, we know recessions come and go, and also when you are in one it feels as though nothing will bring you out of it. Continue reading →